What is a
Special Needs Trust?
A Special Needs Trust, also
referred to as a
Supplemental Needs Trust, is
a trust specially designed
to hold assets on behalf of
a disabled individual in a
manner that will benefit the
individual without
jeopardizing that
individual’s SSI, Medicaid
or other government
benefits. Further,
transfers in to a properly
designed Special Needs Trust
(also referred to as an “SNT”)
will not be a disqualifying
or sanctionable transfer for
the person transferring
assets in to the trust.
Before discussing SNTs
further, however, having a
basic understanding of what
a trust is will be helpful.
What
Exactly is a Trust?
A trust is a separate legal
entity that results from an
agreement between someone
who sets up the trust
(variously called a settlor,
donor, or grantor) and a
trustee who administers
(conserves, invests and
expends) the property in the
trust for the benefit of a
third party (called the
beneficiary).
Almost any sort of property
can be held in trust. This
includes real estate,
stocks, bonds, cash, mutual
funds or insurance
policies. In order to get
the property in to the
trust, however, someone must
transfer the property to the
trustee. In the case of
real estate, for example,
the settlor (or other
property owner) simply
prepares a deed naming the
trustee as the grantee (and
legal owner) of the
property. Similarly, the
settlor can change the name
of the ownership on a bank
or investment account.
Finally, the trustee
establishes a checking
account to which parties can
make deposits and from which
the trustee can make
distributions. In summary,
one client asked me how to
transfer assets to a trust,
and I told her that
basically it was done in the
same way she would transfer
assets to an individual.
While the trustee becomes
the legal owner of the
property, the law holds the
trustee accountable for the
property and the trustee
must hold (or distribute)
the property according to
the terms originally put in
the trust agreement by the
settlor.
A trustee is what is known
as a fiduciary. This means
the trustee must use the
property only for the
beneficiary. The trust
agreement (or trust
document) should explain how
the settlor wants the
trustee to use the property
for the beneficiary.
Sometimes the trustee is
given discretion to make
decisions as to how the
trust fund should be used.
Trusts may be either
revocable or
irrevocable. If it is
revocable, it means
that the trust may be
amended, changed or revoked
by the settlor. If the
trust is irrevocable,
it means that the settlor
cannot revoke or modify the
trust. Some trusts,
especially SNTs, can contain
language that allows the
trustee or some other
special person known as a
“trust advisor” to amend the
trust if it becomes
necessary to do so because
of changed circumstances.
Nevertheless, the settlor
would not be able to make
those changes. For example,
it might be necessary to
amend the trust to comply
with changes in state or
federal law.
Why
a Special Needs Trust?
As noted above, an SNT is a
special type of trust
designed to supplement
benefits received by the
beneficiary (such as SSI or
Medicaid) without
disqualifying the
beneficiary for those
benefits.
Disabled individuals often
receive government
assistance to help them
maintain themselves. Of
course, the most common of
these programs are
Supplemental Security Income
(SSI) and Medicaid. Both of
those programs require a
person to be impoverished in
order to receive benefits.
If a person has too many
assets or income that is too
high, then he or she will
not qualify for SSI benefits
even if disabled. Further,
in North Carolina, he or she
will be ineligible for at
least one type of Medicaid.
However, with an SNT, the
assets being held in the
trust will enable the person
to continue to qualify for
those programs.
Parents with disabled
children also use SNTs to
their advantage. Many are
concerned that if they leave
assets directly to their
children who are disabled,
the disabled children will
fail to qualify for most
government benefit programs
and will quickly spend
through whatever inheritance
they receive. Some parents,
often unwisely, try to work
around this problem by
leaving their entire estates
to their non-disabled
children with the hope that
the non-disabled children
will care for their disabled
sibling. This does not
always work.
An SNT can allow a person
with disabilities to receive
government benefits and
continue to have a source of
funds to pay for other goods
and services that the
government programs will not
provide. Common examples
are specially equipped vans
with lifts, certain medical
procedures that are not
covered, travel to visit
relatives in distant parts
of the country, and various
types of entertainment.
These all enhance the
quality of life of the
disabled individual.
A disabled person can also
fund an SNT for himself or
herself. These sorts of
trusts can hold a person’s
assets (for example, an
inheritance, a significant
settlement from an injury or
some sort of retroactive
award of benefits). These
will be discussed further
below.
How Does an SNT Work?
As discussed above, the
trustee is the person who
makes distributions from the
trust according to the
instructions that are
contained in the trust
agreement. In this case of
an SNT, the trust agreement
must specify that
distributions will be made
in a way that does not
jeopardize the beneficiary’s
entitlement to SSI, Medicaid
or other public benefits.
All of these programs have
stringent rules about how
distributions from an SNT
could affect the
beneficiary’s eligibility
for continuing benefits.
As discussed above, the
assets contained in a
properly drafted SNT will
not “count against” the
beneficiary for continuing
benefit eligibility. On the
other hand, if the trustee
makes a cash distribution
directly to the beneficiary,
that payment will be
considered income to the
beneficiary which could
jeopardize his or her
continuing eligibility for
benefits. Also, there are
very complex rules regarding
payments for food and
shelter which are considered
under SSI to be “in-kind
support and maintenance”.
This sort of income could
reduce the beneficiary’s SSI
benefits . . . or
potentially eliminate them
all together. Accordingly,
it is extremely important
the trustees be careful not
to distribute any money in a
way that will cause a
problem with SSI or any
benefit programs.
Some SNTs, however, might be
drafted in such a way that a
trustee could distribute
money even if it eliminates
the beneficiary’s public
benefits. For example, the
trustee may determine that
the beneficiary’s needs for
housing outweigh his or her
needs for continuing SSI.
In any event, the importance
of adequate advice available
to the trustee cannot be
stressed too much.
What are the Different
Types of SNTs?
Generally, there are two
basic types of SNTs. First,
there are self-settled
trusts, and second,
there are third party
trusts.
As the name implies, a
self-settled trust is
set up using the disabled
beneficiary’s own assets.
For example, a disabled
person who receives an
inheritance or has some
other property that
disqualifies him for public
benefits might have the
property transferred in to a
self-settled trust for his
own use. Of course, a
self-settled trust
established to obtain SSI
must meet stringent
requirements. First, it
must be irrevocable. That
means the settlor cannot
cancel or amend it. Also,
the trust must be
established by a parent,
grandparent, legal guardian
or a court (do not ask why,
it is a strange quirk in the
law and makes no sense).
Notwithstanding the term
“self-settled”, the
beneficiary cannot establish
the trust for himself.
Quite often seeking the
appointment of a guardian
who can establish the trust
becomes necessary. Finally,
the trust must contain a
Medicaid “payback”
provision, which will be
discussed further below.
The second type of SNT is a
third party trust.
As the name implies, these
types of trusts contain
assets that belonged to some
other party at the time of
transfer in to the trust.
Of course, the main example
of this type of trust is one
established by a parent for
a disabled child. A parent
could establish such a trust
either while alive or under
his or her will or living
trust. The main advantage
to these types of trusts is
that there is no requirement
for a Medicaid “payback”
provision. In other words,
the trust may hold assets
for the benefit of a
disabled child until that
child’s death or some future
point in time whereupon the
assets are distributed to
the other children of the settlor.
What are Medicaid
“Payback” Provisions?
Medicaid payback provisions
are those provisions in
certain types of SNTs that
require any remaining funds
in the trust upon the death
of the beneficiary to be
distributed to the state.
As mentioned above, not all
trusts require these
provisions.
Usually the funds remaining
in a self-settled trust
(the first type discussed
above) upon the death of the
beneficiary must be used to
repay the state for benefits
that the state had paid out
while the beneficiary was
alive. Any funds remaining
in the trust after paying
back the state, however, may
be paid to other people
specified in the trust
document. These people are
usually other family
members. If a self-settled
trust does not contain these
Medicaid payback provisions,
it will very likely be
considered a “countable”
asset for the beneficiary.
As mentioned above, funds
contained in a third
party trust do not have
to go to the state.
